Corporate spin off in Q2006

Record a corporate acquisition (stock-for-stock) 1.. In the Account Bar list, select the account you want to use. Quicken opens the account. If the transaction list is not displayed, click the Transactions tab at the top of the account window. 2.. Click Enter Transactions. 3.. In the Enter Transaction list, select Corporate Acquisition (stock for stock). 4.. Use this dialog to change the security name and price information when a corporation acquires another corporation or entity you currently own and track in Quicken. Click a link below if you need additional information. Company acquired Select the name of the security as it is currently identified in your Quicken transaction list.

Acquiring company Enter the name of the parent company that is buying the other.

New shares issued Enter the number of new shares of the parent company that are being issued for every share of the acquired company.

Price per share for acquiring company Enter the share price of the parent company after the acquisition.

MedRxman: Thanks for your quick reply. I went through all the steps you suggested, the numbers were still incorrect. This was not one company acquiring another. It was one company divesting [selling,"spin off"] one part of it's holdings into a totally different co. RE: Altreia, spun off Kraft. What am I missing, or do not understand? GB

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My Error: This should work:

Record a corporate spin-off of new securities 1.. In the Account Bar list, select the account you want to use. Quicken opens the account. If the transaction list is not displayed, click the Transactions tab at the top of the account window. 2.. Click Enter Transactions. 3.. In the Enter Transaction list, select Corporate Securities Spin-off. 4.. Use this dialog to change the security name and price information when a corporation spins off another corporation or entity. Click a link below if you need additional information. Security Name Enter the name of the security as it is currently identified in your Quicken transaction list.

New Company Enter the name of the new corporation or entity that will receive the spin-off shares.

New shares issued Enter the number of new shares the corporation is issuing for each old share. This information should be available from the parent company or from news articles on the day of the spin-off.

Cost per old share Enter the closing price per share of your original security, on the date of the spin-off.

Cost per new share Enter the cost per share of the new security (the one that was spun off), on the date of the spin-off.

Taxable spin-off If this is a taxable spin-off, select the check box.

Hi, GB.

Step 1, of course, is to understand what happened in the real world. News reports usually tell us, but often leave out some important details. The best place to get the information is usually from the parent company. Nowadays, we can just go to their website and click on something like Investor Relations.

In this case, the parent is NOT Philip Morris, but PM's parent, Altria. A little searching found: Kraft Spin-Off Investor Information

The link there took me to the page we really want: Kraft Spin-Off Investor Information But the spin-off did not happen in 2006. To quote:: "The distribution of Kraft's outstanding shares owned by Altria was made on March 30, 2007, to Altria shareholders of record as of 5:00 p.m. Eastern Time on March 16,

2007." Then the Kraft page refers us back to the Altria page for details, where we see, "Altria will distribute 0.692024 of a share of Kraft for every share of Altria common stock outstanding as of the Record Date,..."

Step 2 is to record what actually happened in Step 1.

In Quicken 2007, click Enter Transaction and choose Corporate Securities Spin-Off. The transaction date is 3/30/07. Security name is Altria Group, Inc.. The new company is Kraft, Inc. New shares issued is 0.692024 (of Kraft) per old share (of Altria). And leave blank the "taxable spinoff" box; Altria says it qualifies as tax-free. You may want to make some notations in the Memo box.

But that is as far as we can go until we get two more bits of information: the Fair Market Values of Altria and Kraft immediately AFTER the spin-off. Quicken asks for the "Cost" of the old and new shares, but that is not correct. When we know the FMVs of the shares, Quicken can then calculate the new bases (cost) of the old and new shares, based on the ratio of those values, applied to your adjusted basis in Altria. Quicken will adjust the basis for all the lots of Altria that you owned, and will record the basis of matching lots of Kraft, and will show the acquisition dates for each lot as of the dates you acquired the matching lots of Altria. (This will have the unfortunate effect of showing that you owned Kraft shares before

3/30/07, which is wrong, of course; we haven't figured out a good way to fix this, and neither has Intuit, apparently.)

The actual spin-off date was just a couple of days ago. Within a very few days, Altria should determine and publish their opinion as to the FMVs of Altria and Kraft for shareholders to use in the calculation. (FMV is a matter of opinion and you are free to argue for different numbers, but it rarely is worth the trouble.)

You probably will be entitled to a fractional share of Kraft and will receive cash in lieu of that fraction. Immediately after recording the spin-off, you should record the sale of this fraction for the amount of the check you will receive. Use the per-share basis that Quicken has just calculated and your Altria acquisition date; Quicken should handle this for you automatically.

For further information, watch the Altria and Kraft web pages.

I've been retired for over a dozen years and tax rules change daily, GB. Be sure to check with your own CPA to be sure that my understanding is still correct.

RC

[portion snipped]

The "unfortunate" effect is not unfortunate, but necessary. In a tax free spinoff, your holding period for the spinoff shares is the same as your holding period for the (ex-)parent company. It's as if the two companies were always independent.

Ira Smilovitz

Hi, Ira.

Maybe we need a different adjective. I agree that it is necessary, but the effect might produce some misleading reports, unfortunately. ;^}

What I was trying to say is that, if the investor had bought Altria on

1/1/06, and now, post-spinoff, produces a financial statement for 12/31/06 - or any other date between 1/1/06 and 3/30/07 - it will show that he owned BOTH Altria and Kraft shares at that date, which is not correct.

Since I haven't had this situation, I'm not sure what market values would be shown. Since Kraft didn't exist then, its value presumably would be zero. And since Altria did exist, it should be properly priced at that day's quote. So, perhaps no damage is done, except for showing the ethereal Kraft shares. But I have seen others complain in this newsgroup about this problem so I thought I should mention it.

I probably should explain a comment that I made in my first post. I said, "But the spin-off did not happen in 2006." That was because I overlooked the "Q" in "Q2006" in the Subject line. No harm, no foul, I suppose, but it might have made a reader wonder.

RC

Actually, I don't think the "effect" is "necessary". The effect is the result of using Buy transactions to "acquire" the lots of the spun off company. Quicken Buy transactions always make the "acquisition date" equal to the "transaction date" ... creating the "effect".

If "Add Shares" transactions are substituted for the Buy transactions, the transaction date can be the date of the spin off, while the acquisition date can be specified separately, as the date the lot of the company doing the spinoff was acquired. This gets correct acquisition dates for cost basis while avoiding making it seem as if you owned the spunoff company before it existed.

(Changing the Buys to Shares Added also requires modifying the Return of Capital transactions to "transfer" the cash back into the Quicken account where the spinoff is recorded, so as to no leave cash in the account.)

RC,

You explained that well. And I beleive you are current in all your statement. I understand how to compute this on paper but i'm having troubling inputing this into Quicken.

Can you please tell me what I'm doing wrong??? I'm entering the following information:

New shares issued = 0.692024 per old share

Cost per old share = 65.90 post spinoff

Cost per new share = 31.66 post spinoff

It seems like I am getting the correct new shares number for Kraft. The problem is the new cost basis of both securities. Altria is coming up with 77 (which is was my cost basis pre-spin off before commissions) and Kraft is coming up with 27.95. At the end of the transaction shouldn't Altria be 65.90 and Kraft be 31.66? What am I missing?

Altria post an example > Hi, GB.

Information

Information

========================================> New shares issued = 0.692024 per old share OK USE THESE PRICES

This is adjusted price

===============================================> It seems like I am getting the correct new shares number for Kraft.

will adjust the

As an old Quicken user, and follower of this group, this issue comes up constantly. Think AT&T.

Quicken's share for share acquisition has the identical issue, which I have found works much better for corporate name changes, such as Philip Morris becoming Altria Group back in 2003. (If you use "corporate name change, it changes (or did in Q2004) the name all the way back. But I like my reports to show Philip Morris through 2003, and then Altria. Doing a 1 share for 1 share acquisition transaction preserves the basis, and name change date.

Altria posted a Shareholder Tax Basis information sheet today. They used closing prices on 4/2 for FMV. I'm not sure I agree, but its not worth the headache of ever having to deal with the issue.

With the information sheet in hand, I tried the Quicken Spin Off transaction method, and it generated a Kraft acquisition date that was the same as my old Philip Morris purchase date. I don't recall when PM purchased Kraft, but Philip Morris (as it then was) sold off 11% of the Kraft stock in June 2001. SEE KRAFT 10-K: Thus, the Quicken method will generate incorrect reports during the 2001-2007 period.

As an alternative, I tried the Quicken Return of Capital transaction to reduce my Altria basis, and the Add Shares transaction which let's me include both my allocable Kraft basis (which is the same as my Altria return of capital) and assign my PM acquisition date to the Kraft shares. This has the advantage of accurate rerports of my holdings or net worth. It also has the DISadvantage of including the Return of Capital as cash in the account. A Miscellaneous Expense for "Fudge Factor" takes care of that.

It isn't pretty. But I think it works. (And if it doesn't, I look forward for your always elegant explanation). Next, i need to deal with my fractional share cash-out, and then on to my 401(k) where I've used its dividend reinvestment option.

ONE LAST POINT -- the folks who provide the stock quotes to Quicken have edited all of last weeks quotes to reflect the WI (when issued) quotes. I was expecting the Friday 3/30/07 quote to get changed, but they changed the entire week !! I only discovered this because I dated my transaction as Saturday

3/31/07, and needed to erase the bogus 3/31/07 stock price value.

Keep up the great explanations.

-dllapides

Hi, AA.

Thanks for that URL

No. Those are the Fair Market Values of those shares, NOT their adjusted bases in your hands. Before the spin-off, you had a "paper gain" in Altria; it had cost you $77 and was worth $87.81. After the spinoff, your total adjusted basis should not have changed; it should still be $77 times the number of Altria shares (since you still have the same number of Altria shares, too).

There are several ways to compute your new basis outside of Quicken, using good old pencil and paper. One way is to calculate that Altria is worth $65.90/$87.81 = 75% (rounded) of the total value of 1 Altria and .692024 Kraft, so its new basis should be 75% of your original $77 basis, or $57.75 per share. That fractional share of Kraft would be worth the other 25%, or $19.25. The total new basis is $57.75 + $19.25 = $77.00, the same as your original basis. To get the basis of a full share of Kraft, divide $19.25 by the .692024 fraction = $27.82 (rounded).

If you had 100 shares of Altria at a total basis of $7,700.00, you should now have:

100 shares of Altria at a basis of $57.75 per share = $5,775.00, plus 69.2024 shares of Kraft at a basis of $27.82 per share = $1,925.00 (rounded), for a total adjusted basis of $7,700.00

You would immediately sell the .2024 fractional share of Kraft at $31.66 per share and receive a check for $6.41. Deduct your basis for that fractional share (.2024 * $27.82 = $5.63) and you have a $0.78 capital gain. This will leave you with 69 shares of Kraft with a basis of $27.82 per share. Your total basis for Altria and Kraft will now be $7,700 - $5.63 = $7,694.37.

When I poked these numbers (65.90 and 31.66) into Quicken 2007 Basic, I got adjusted bases of $5,778.76 for 100 Altria and $1,921.24 for 69.2024 Kraft. On the Transactions tab, there is a Return of Capital for Altria and a Bought for Kraft, each in the amount of $1,921.24. On the Summary or Portfolio page, the total bases are shown, but not the per-share basis.

I don't know why you got different bases. Try it again and see what you get.

RC

You don't need the extra MiscExp transaction; just modify the Return of Capital transaction to "transfer" the cash back into the investment account itself.

Thanx--

As much as I like including a fudge factor , your suggestion does the trick.

-dllapides

John--

Your suggestion worked for my Altria holdings held in my plain vanilla brokerage account.

But the "Return of Capital -- Transfer" transaction is NOT available for IRA accounts. (I also hold Altria in an IRA rollover account from an old 401(k).)

But the "Cash Withdrawal" transaction allows a transfer to itself ("WithdrwX") and eliminates the cash balance created from my Return of Capital. I get to use Fudge after all.

-dllapides

You're so right; I hadn't really thought about that, though I knew it was possible to hold stocks in retirement accounts. Interestingly, if you had left the Quicken account type as 401k (which I'm not recommending), you would have been able to transfer the Return of Capital back into the 401k account.

I'm not sure what Intuit's reasoning is in preventing some IRA account transactions from having their normal transfer ability, while allowing others to function normally. Transfers into and out of IRA accounts do have potentially special considerations, but so do other tax-deferred accounts: I can't see the reasoning behind the current Quicken policy.

Hello

I followed all the suggestions [the one's that applied to my plight].

Everything worked as advertised, [helps when I input the correct numbers].

I want to say "thank you" to all that replied.

All is appreciated.

GB

Hi All:

Continuation of saga from above!

Every thing with the Kraft spin off from MO is a bag of worms, why can't intuit get things right, if they would just improve on the program from year to year, instead of trying make a totally new program with all new whistles and bells, that are full of bugs.

New problem, sold all my KFT today, downloaded the transactions into Quicken 2006, tried to accept them, got the following message [ACCEPTING A SHORT TRANSACTION]. Quicken thinks I do not hold any shares of KFT! and I want short some!!! WHY??

Hope someone can help. tks Guys. GB